Oh, wait. There’s some green: German bunds are at record highs. The 10-year bund is yielding just 1.45%.

A principal catalyst for this morning’s meltdown is, alas, Greece. But there are other troubling signs. Spain held an auction of Treasury bills and paid steeper yields. A 12-month bill had an average rate of 2.99%, up from 2.62% at the previous auction. Demand for that and for an 18-month bill was weaker.

And industrial production figures out Monday morning showed a 2.2% year-over-year decline in March across the 17-nation euro zone.

For all the Sturm und Drang in Athens, and for all the stress inside Europe’s monetary union–about which we’ve spilled muchink–the currency itself is remarkably stable. Tom Lauricella and I have a look at some of the reasons why in today’s paper. There are natural sources of support, from Asian central banks, for instance, and much of the crisis flow has been intra-currency–from Spain and Italy to Germany.

Still, there is no doubt that the monetary union is gravely strained. The strong have been financing the weak, who are prevented by the fixed currency from devaluing to right that balance. The only option for the weak is a root-and-branch reform of their economies, and enduring years of pain until it is complete. It is ugly.

But it is also worth thinking about the magnetic forces that, for the moment, are keeping the euro zone together. The great question for Europe over the coming months and years is whether they are strong enough to hold.

Nobody asked them, but European markets have cast their protest vote, too.

After weekend elections in France and Greece that will mark a change of course–how great is yet to be seen–for the euro crisis, markets opened Monday with a thud. In France, Socialist challenger François Hollande beat President Nicolas Sarkozy, as expected. In Greece, a smorgasbord of parties won parliamentary seats, leaving no one with a clear mandate.

The story told by the tape is clear: Investors this morning see a larger risk of a euro breakup. Stock markets across the continent are down (the U.K. has the good sense to have a bank holiday today, and London is closed), reflecting a broad flight out of riskier assets. Our old friend the safe-haven German bund is up, and the dangerous duo of Italian and Spanish bonds are down.

That’s the classic risk-off trade we’ve seen countless times during the ebb and flow of the debt crisis. But we’ve also seen a strong reaction in the otherwise steady euro. It dipped below $1.30 in Asian trading and is now fluttering around that mark. The euro had been above $1.31 all week, and it last saw $1.30 in January.

The euro’s weakness is not a good sign. Much of the recent crisis-related flow has been out of some euro assets (Spanish and Italian) and into others (German). That’s still happening to some degree–German bonds are stronger–but the weaker euro implies that there’s movement out of euro assets altogether.

For much of the past two years, Spain and Italy have swapped the inglorious title of Biggest Euro-Zone Worry.

Bloomberg News

The latest round has gone to Spain.

Friday was another miserable day in Madrid. The stock market closed down 3.58%, and yields on Spanish 10-year bonds are now at 5.99%, up from 5.36% at the beginning of the month. They are at their worst level all year. Spain now has all the hallmarks of a country in serious trouble: desperate moves to close a stubborn fiscal gap, steadily rising bond yields that indicate financing is being cut off, and macroeconomic weakness that suggests the austerity push is driving the economy deeper into a rut.

It’s impossible to say how many times the efforts of the eurocrats were dismissed as merely “kicking the can down the road.” The cliche became so overused, even the people who were using it got sick of using it (trust us, we know.) The problem all along, though, has been that the eurocrats have more cans than road. Maybe that’s starting to become clear.

Last year, the market looked the Greek bond-swap offer, looked at the flood of liquidity from the European Central Bank (the LTRO operation), and concluded the “crisis” was off the table. At least in the short term. Which is all most of the hot shots in the market care about. Cue the rally.

Not only, though, is the crisis not off the table, it’s about to take up a bigger chunk of the table. Consider this: Ireland is the world’s 42nd largest economy, by GDP; Greece is 32nd.

Spain is the 12th. Italy is the 8th. If Spain and Italy spiral out of control, they’ll be to Greece and Ireland what Lehman was to Bear Stearns.

Saying that a country should leave the euro zone is easy. Actually doing it? Not so much. The currency union was crafted to be irrevocable, so a rupture will by nature be messy. Planning for an exit means thinking about a million things like re-denominating contracts, settling interest-rate derivatives, printing notes and minting coins, and even when–or if–to announce a plan to the public.

Still, for £250,000, plenty of people are willing to do the thinking.

That’s the bounty of the Wolfson Economics Prize, announced last year to reward the best paper on how to break up the monetary union, if it comes to that.

Five finalists–each of whom gets £10,000–were announced this morning. The papers make plain how varied the options for a break-up are.

It was barely two weeks ago that holders of €177 billion in Greek bonds had their securities zapped and replaced by new bonds, the central piece of the country’s historic debt default.

Those new bonds have had an unhappy life.

Greek creditors got a package of 20 new bonds for each old bond, with varying maturities between 2023 and 2042. At the time of the exchange last Monday, the collection of bonds was priced by markets at around a quarter of face value. Now it has dipped below 20 cents.

The European markets were kind to no one today. The major continental bourses were all off more than 1%, with falls of 1.7% in Italy and 1.6% in France and Spain. The euro sunk below $1.32. The blame is on a weak purchasing-managers’ survey.

That’s bad news for Europe, which desperately needs economic growth to pull its troubled governments out of their debt traps. As one might expect, bond prices slid (and yields rose) in Italy and Spain. They did in Greece, too, but no one’s paying attention anymore, and Portugal’s market is so thinly traded that it’s impossible to draw any conclusions.

But what should be most worrying to euro-zone policy makers is the right side of this chart.

The two-stage auction used to determine the amount that credit-default swaps on Greece will pay out is underway.

Stage 1 just wrapped up, and the dealers participating in it set an initial price of 21.75; that implies that the final payout to swap holders will be around 78.25, though we’ll need to wait a few more hours for the final result.

There are $3.2 billion in Greek CDS outstanding, so around $2.5 billion will be paid from sellers of the protection to the buyers.

This very neatly matches the loss suffered by creditors in the Greek restructuring. For those who long ago tired of Greece, a reminder: For each €100 in Greek bonds, Greece gave creditors €15 in high-quality bonds from the euro-zone rescue fund, plus a package of 20 new Greek bonds with a face value of €31.5. Since those bonds have been trading at around a quarter of their face value, they are worth €8. The high-quality bonds are worth €15, so the total is €23. Therefore a Greek bondholder lost €77 on his €100 bond.

A payout of around €78 in the CDS auction would be very close to the “right” amount of compensation–after all, CDS are designed to pay off in proportion to the loss suffered by creditors.

But as we detail in a story today, the happy CDS result is a product of luck: the auction process is using the price of new Greek bonds to determine the payout to CDS holders. But, happily, some of the new Greek bonds’ prices mirror the amount of consideration paid to creditors in the restructuring; there was no reason that that had to be the case:

By happenstance, some of the new bonds Greece has issued in its restructuring have a market price close to the total value of the package creditors received—about 22 cents on the euro. Those bonds will help set the CDS payout, and trouble will be averted: CDS holders will receive about 78 cents, roughly equivalent to the loss bondholders suffered.

“You can’t be certain that this happy coincidence will happen next time,” said Tess Weil, a lawyer at Purrington Moody Weil LLP in New York who represents hedge funds and other “buy-side” clients. Ms. Weil said she expects the issue will spur a “push to revisit” the CDS rules.

With all the excitement over the Greek bond swap, we’d forgotten about the European Central Bank’s holdings, which we detailed a few weeks ago here.

Remember, the ECB (and the euro-zone national central banks) didn’t “participate” in the Greek debt exchange, though they had more than €50 billion in Greek debt. Rather, Greece arranged a side deal in which the central banks exchanged their bonds for new ones that are identical in all material respects–except the issue date, which was changed to 2012. Thanks to that difference, they weren’t covered by the restructuring, which included only bonds issued on Dec. 31, 2011, or earlier.

Nicely done.

Now the two versions of same old bond are getting very different treatment.

Credit Suisse’s fixed-income research team points out in a note this morning that the first bill is coming due. The famous March 20 bond–the €14.5 billion issue that Greece didn’t have the money to repay–matures next week. Most of the holders were private creditors. They’ll get nothing next week. Instead, they’ve received some cash-like securities and a withered package of new bonds that doesn’t begin maturing until 2023.

The ECB and the national central banks still hold €4.7 billion worth of the March 20 bond; they’ll get their money back on Tuesday.

Technocrats in Athens, Berlin and Washington Friday are no doubt congratulating each other for designing a bond swap that slashed more than EUR100 billion off Greece’s debt mountain.

But let’s not kid ourselves: the two-year story behind this debt restructuring is an ugly one of politicking and wasted time. There are no winners here, and there are already more losers arising from its far-reaching ramifications.

There are, however, lessons to be learned from this unseemly string of events. The most important is that our financial system is still trapped by the dilemma posed by Too-Big-to-Fail banks–four years since the U.S. mortgage crisis. Financial sector lobbyists who argue that now is not the time to fix that dysfunctional system should have a thorough reading of the Greece story.

Officials will crow that a higher-than-expected 83% of Greece’s old bonds was “voluntarily” tendered into this debt swap and so claim justification for triggering the collective action clauses that will force the remaining holders of Greek law securities into the exchange. But without those CACs hanging like Damocles’ Sword over them, and without the pressure that governments and national central banks brought to bear on banks and pension funds from Greece, Germany and France, would so many have willingly accepted a 73%-plus writeoff? As Commerzbank CEO Martin Blessing recently put it, this deal was as “voluntary as a confession during the Spanish Inquisition.”

In all, €206 billion of Greek bonds were subject to the exchange, of which:

€177 billion are Greek-government bonds issued under Greek law

€18 billion are Greek-government bonds issued under foreign law

€7 billion are bonds issued under Greek law by state-owned companies and guaranteed by Greece

€3 billion are bonds issued under foreign law by state-owned companies and guaranteed by Greece

(Yes, it doesn’t add because of rounding.)

Of the first category, about €143 billion tendered their bonds in the swap. Another €9 billion, for a total of €152 billion, didn’t tender but agreed to let Greece force everyone to swap. Greece needed just two-thirds in favor to use the so-called collective-action clauses. Its tally of 86% easily cleared that hurdle, and so all €177 billion will be swapped.

Of the remaining €29 billion, €20 billion submitted to the swap, Greece said. It didn’t detail the categories. The €9 billion in holdouts have a new deadline–until 8 p.m. London time on March 23–to change their minds.

The headlines are hitting the wire now. In all, €172 billion of the €206 billion in Greek bonds up for exchange have tendered for the swap–that’s 83%, quite close to expectations.

And Greece will pull the collective-action clause trigger to force all the Greek-law bond holders into the exchange. That brings participation to 96%.

This is very much in line with expectations: Greece got a lot of Greek-law bondholders to submit voluntarily, but it was still tens of billions short of the whole lot. It’s a reasonable assumption that many of the Greek-law holdouts were in the bond that matures on March 20.

Greece simply doesn’t have the money to pay them, and practically zero chance of the euro zone pulling together in the next week to front Greece the cash. In that very practical sense, invoking the collective-action clauses was a straightforward move. Those March 20 bonds (there’s a total of €14.5 billion outstanding) are swapped into bonds maturing in 2023 to 2042.

Although it’s a topic that has been swirling for months, this week’s decision by the ISDA determinations committee for Europe against triggering CDS payouts on Greece — at least for now — is renewing the debate about how effective sovereign CDS are in protecting against a restructuring.

Despite all these “buts,” many in the market also feel that the episode with Greece has exposed some shortcomings in CDS acting as a form of insurance against losses on sovereign credit.

Not counting a 2009 default by Ecuador, which barely registered on broader financial markets, Greece is the first high-profile sovereign CDS case for ISDA to rule on even if it’s still a relatively small amount of money by Wall Street standards. (In January 2009 there was a net $473 million of CDS outstanding on Ecuador. With Greece, net CDS total $3.2 billion.)

“The real issue here is the viability of sovereign CDS,” said Kevin McPartland, principal at independent research firm TABB Group in a note Thursday. “If the market is now left thinking that anytime a sovereign default is inevitable the relevant regulators will structure the event in such a way that it is not technically a default, why buy the CDS at all?”

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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.

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